M.Comm. / Microfinance refers to the provision of financial services, in particular small loans in the context of South Africa, to poor people with very small businesses. Commercial banks have largely considered poor people in remote areas unbankable, because they lack collateral and have no credit histories. Microfinance institutions emerged as unconventional institutions with innovative techniques, mechanisms and instruments to advance financial services to this segmented part of the population. This has, however, not been without challenges. Microfinance institutions face a number of challenges such as lack of competent human capital, unfavourable regulatory environment, and insufficient financing. The study examines if these challenges are applicable in the South African context and whether financial and operational inefficiency has hindered microfinance institutions in South Africa from sustainably increasing their outreach through the provision of microcredit. It surveys two microfinance institutions, characterised as non-governmental organisations using the group lending methodology to offer microloans to the very poor. The results indicate that microfinance institutions are not on a sound fiscal footing, and large operating expenses have resulted in some form of inefficiency. This has, however, not hindered the microfinance institutions from reaching a greater number of borrowers. The witnessed increased outreach in number of clients reached is considered unsustainable given the existence of inefficiency and financial weakness. The results suggest a number of policy options on the side of government and the institutions concerned. Increasing the funding sources available to microfinance institutions should be considered by both government and private institutions. This policy would succeed if microfinance institutions work at reducing their operational costs and become both efficient and sustainable so as to be seen as viable investment options.